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California Bankrupt?

By Michael Snyder, on June 21st, 2010

Is the state of California bankrupt? Well, an increasing number of politicians and economic analysts are answering that question in the affirmative. The truth is that California is a complete and total economic disaster area. The state government of California is projected to have a budget deficit of at least 19 billion dollars this year, and next year the budget gap is projected to grow to 37 billion dollars. To put that in perspective, the entire budget for the government of California is only about $125 billion per year. Already, California’s credit rating is the lowest of all 50 states, and there are persistent rumors that it is about to go lower. If California’s credit rating is slashed, it will be very expensive for them to borrow the money that they desperately need. Once upon a time, the state of California was the poster child for the American Dream, but now it is on the leading edge of America’s rapidly unfolding economic nightmare.

Leaders from both major political parties in California have been increasingly using the word “bankruptcy” in recent weeks. In fact, California Attorney General Jerry Brown was very open about California’s horrific finances when he recently told a group of young Democrats the following….

“California is deeply in debt. You could say that it’s bankrupt.”

Jean Ross, executive director of the California Budget Project was even more direct when she recently issued the following ominous warning about California’s finances….

“We are on the verge of system failure.”

The truth is that California is literally drowning in a sea of red ink. They keep making larger and larger budget cuts, but the financial problems just continue to get worse.

Already, the severe budget cuts are turning California into a shell of what it once was, and yet everyone agrees that even deeper cuts are needed. But what will California look like at the end of this? The new “normal” may look a whole lot different from the “California Dream” that once drew so many people to the state. A recent article in the Globe and Mail put it this way….

Mass layoffs, slashed health and welfare services, closed parks, crumbling superhighways and ever-larger public school class sizes are all part of the new normal.

The biggest crisis of all may be the state’s pension fund. CalPERS currently has about $16.3 billion more in liabilities than assets. Not only that, but a state report released earlier this year says that California is also facing a $51.8 billion bill for the health and dental benefits of current and future state retirees.

Ouch.

So where in the world are the taxes going to come from to pay for all of these obligations?

It is hard to see a way out of this mess, especially considering the fact that California’s economy is coming apart like a 20 dollar suit.

Not only that, but unemployment in California has reached unprecedented levels. There are now 8 counties in the state that have unemployment rates of over 20 percent.

To put that in perspective, consider the following. The number of people now unemployed in the state of California is equal to the populations of Nevada, New Hampshire and Vermont combined.

Yes, things really are that bad in California.

Nobody has a safe job anymore – not even teachers. Just recently, the state of California handed pink slips to nearly 22,000 teachers across the state.

Can you imagine firing 22,000 teachers?

Unfortunately, firing all of those teachers barely even made a dent in California’s budget problems.

California Governor Arnold Schwarzenegger is pledging to seek “terrible cuts” in an effort to get California’s financial situation under control, but the truth is that there are not many more areas that can be slashed without voter approval.

California has cut billions of dollars from its education system, including its renowned network of public colleges and universities. Many thousands of teachers have been let go. Budget officials travel the state with a glazed look in their eyes, having tried everything they can think of to balance the state budget. And still the deficits persist.

On top of everything else, California’s health care system is also on the verge of collapse. In fact, literally dozens of California hospitals and emergency rooms have shut down over the past ten years.

Why have so many shut down?

The truth is that many hospitals and emergency rooms simply could not afford to stay open as they were endlessly swamped with illegal immigrants, unemployed Californians and homeless people who were simply not able to pay for the services that they were receiving.

As a result of these hospital and emergency room closings, the rest of the health care system in California is now beyond overloaded. This had led to brutally long waits, diverted ambulances and even unnecessary patient deaths.

And unfortunately, the number of people in California who are unable to pay for their emergency medical care is only increasing.

Say the state can’t make its debt payments, and no one will lend it any more money. In that case, the federal government can step in and put the state into receivership. This would involve the assignment of an accountant to manage the state’s debt, overseen by a judge. It would be a lot like bankruptcy, except instead of following a structured set of steps—informing creditors, appointing creditors’ committees, a 120-day window to file a plan, etc.—a receiver has the authority to force creditors to renegotiate loans in a speedy fashion. However, the accountant in charge would not have the power to make decisions about the state’s budget, such as which programs needed to be cut and which taxes had to be raised. (No state has ever gone into receivership.)

Let us hope that this does not happen, but the truth is that California is facing a rapidly rising tide of red ink that it cannot possibly handle. Without a massive amount of federal money, California finances are doomed.

But California is far from alone. They are just on the bleeding edge of a horrific financial bloodbath. State and local governments all over the United States are in financial panic mode, and as the U.S. economy continues to implode, things are only going to go from bad to worse.

Why doesn’t California just create a State Bank and use its assets as deposits? They have hundreds of billions of liquid assets, like pension funds etc. The State Bank could loan Caifornia’s money to itself. It could even make loans directly to its citizens at lower than market rates – like a 4% loan to a CA resident to go to a CA school.

The idea that “there are no solutions” other than a Federal bailout or “severe cuts” is what the Banks want you to believe.

Greg

So true Benjamin. However, this crisis is not supposed to be solved, just like we can’t figure out how to keep those bad ol’ messicans from sneaking across our border, or how to stop the thousands of tons of drugs from coming in to our nation, or how to make people work in order to eat, or how to stop illegal invaders from getting government (taxpayer) benefits…. America is very intentionally being brought to such a point-of-no-return crisis that the sheeple will bleat out longingly for our wolf-leaders to rescue us with a new currency and a new nation that is combined with Mexico and Canada.

concerned reader

I could not help but notice that citizens of Los Angelas recently rioted over the recent Lakers game. Now, if they will go to that much trouble for a basketball game, I am frightened at will happen when their entitlement heaven finally meets its end.

Jack

@ Ben and Greg

You two nuts? State liabilities already exceed assets! Making this state bank of yours would only hide that fact until those liabilities came due (which they will!) In the end we default again, only now with more on the table for the creditors to take.

That sound like a good idea to you?

Greg

Jack – What Ben suggested is actually a viable alternative. Money is merely a form of exchange and it is being used to “bankrupt” California. The state has abundant resources and if it traded with their own assets they would be fine. We all know that is not going to happen as well as we know the state is not going to stop bleeding to death by paying for all the expenses of the illegal invaders. As with many of the problems listed on this site, there are solutions but the purpose of those in control is not to bring a solution but instead to create chaos. We will get to the point where there are no solutions and that day may already be upon us.

dale

However, most of those resources are locked up by regulation and when president Obama is reelected, those regulation will beoome ever harsher. California leads/follows the federal govenment. Admit it California is bancrupt.

FatSean

Perhaps if there was less Federal Pork. California only sees about 60 cents in Federal spending for each $1.00 they contribute in Federal income tax.

If this money wasn’t being handed out to other states, California’s budget would look much much better.

what I do not understand is why the California voters would even consider electing the former CEO’s who are trying to buy the election. These are the same CEO’s who shipped thousands of good paying American jobs overseas. Hardly anyone I would want running a state. What a joke.

Gary

BTW-The border/illegal issue is caused by right wing businesses wanting cheap labor and their enablers on the repubs in gov. They know they can not exploit american workers to the degree they exploit the illegals. I am firmly convinced that the corporations really think we should be paying them to work there.

WE NEED SOCIALISM. Spread the wealth.

M Schwartz

Importing millions of high school drop outs was a bad idea? Well, who would have guessed?!

“California’s financial unraveling has prompted a long-overdue debate about taxes, regulation, and government spending, but the state’s media and government continue to ignore what could be an even greater problem: the irreparable damage to California’s human capital that nearly 30 years of unrestrained illegal immigration has achieved.

This is not an immigration problem, or even an illegal-immigration problem, per se. A strong case could be made that, in terms of educational achievement, industriousness, and entrepreneurial acumen, Asian immigrants to California have proven superior to white natives of the state. Therefore, if California were to experience a wave of mass immigration from Asia, its long-term economic prospects would be improved. Today’s Hispanic immigrants would probably have the same effect if they came from the top 10 to 20 percent of their society according to those same measures of human capital rather than from its bottom rungs. But the influx has instead been composed mainly of the poorly educated, the unskilled, and the illiterate. Such immigrants will likely soon dominate the state’s overall population and politics….

In short, we are witnessing a highly advanced and prosperous state, long endowed with superior human capital, turning into the exact opposite in just one generation. What can be done to stop this race to the bottom? The answer is simple: California and Washington need to enforce existing immigration law. Unfortunately, it is difficult to convince the public that this is necessary, so deeply entrenched are myths about illegal immigration.

One myth is that because America is a country of immigrants and has successfully absorbed waves of immigration in the past, it can absorb this wave. But the argument neglects two key differences between past waves and the current influx. First, the immigrant population is more than double today what it was following the most massive previous immigration wave (that of the late 19th century). Second, and much more important, as scholars from the Manhattan Institute have shown, earlier immigrants were much more likely to bring with them useful skills. Some Hispanic immigrants certainly do integrate, but most do not. Research has shown that even after 20 years in the country, most illegal aliens (the overwhelming majority of whom are Hispanic) and their children remain poor, unskilled, and culturally isolated they constitute a new permanent underclass.

Perhaps the most disingenuous myth about illegal immigrants is that they do not impose any cost on society. The reality is that even those who work and half do not, according to the Pew Hispanic Center cannot subsist on the wages they receive and depend on public assistance to a large degree. Research on Los Angeles immigrants by Harvard University scholar George J. Borjas shows that 40.1 percent of immigrant families with non-citizen heads of household receive welfare, compared with 12.7 percent of households with native-born heads. Illegal immigrants also increase public expenditures on health care, education, and prisons. In California today, illegal immigrants’ cost to the taxpayer is estimated to be $13 billion half the state’s budget deficit.

The state should stop providing welfare and other social services to illegal aliens as existing statutes demand and severely punish employers who break the law by hiring illegal immigrants. This would immediately remove powerful economic incentives for illegal immigration, and millions of illegal aliens would return to their countries. Instead, with President Obama in the White House and the Democrats controlling Congress, an amnesty for the country’s 13 million illegal immigrants may be soon to come.

Milton Friedman once said that unrestrained immigration and the welfare state do not mix. Must we wait until California catches up with Mexico to realize how right he was?

I agree with creation of State Bank in California, as currently exists in North Dakota, the state with least overall budget issues in US. In addition, 2 immediate fixes can be implemented.

(1) Have all Gov’t retirees default to Medicare at 65, and terminate all current plans as unfunded, for those at reaching 65.
(2) mandate Overtime labor does not qualify for Pension earning purposes, as is case in real world today.

Greg

Come on Gary, I have spent so much effort educating you and you STILL think there is a government solution to this problem. I can assure you that there are many conservatives who are the antithesis of you with your ridiculous babysitter socialist infatuation who are not stealing from others and who do not want cheap illegal labor. There are some terrible people who are CEOs but there are also some terrible people at the bottom of the financial pecking order. This mess is created for a specific agenda. Surely you love our current Socialist President and he has apparently admitted that the borders are intentionally being left open and that there will be no efforts to stem the tide of illegal immigration. Doesn’t that make him worse than the CEOs you despise who may hire some of the influx? Do you understand what you are asking for when you hold your beggar’s cup out and ask for a Socialist government to fill it for you?

Gary

I think M Schwartz really sums it up good. We already have a large functionally illiterate US population. Why in heavens name would we want to have more low skill people come into the country? Oh I know-so corporations and business can drive down wages and destroy unions. That way they have enough money for the 5th house in the Hamptons. What these short sited idiots did not realize is that no middle class=people have no money to buy their products and everyone suffers (almost everyone-don’t get me started on taxing the rich hard…)

Greg-I really do appreciate your efforts to educate me. It is probably an exercise in futility :) I used to vote republican until I woke up and saw that all they care about is rich people getting tax breaks and corporations/profits being put before people. You can simply look around to see the tremendous damage the conservative policies have done to our country.

Greg

Gary – I understand your disdain for the Republican Party. The American people have been screwed right and screwed left and that will continue. The supposed choice we have had to vote for one of the two parties has been used for the purpose of keeping people blindly hoping that things would change but all of the politicians support the same root causes and those all lead to the demise of the American way. My points for this latest response to you would be 1) we have not had true conservative values for decades 2) labels are dangerous and any person under a label that we think we like can still be absolutely despicable 3) no one should delude themselves into believing that we are going to get a Socialist Robin Hood or any other type government to rescue us, no matter what label they put upon themselves.

It was my recognition that the “conservative” leaders I had voted for did not do anything different than the “liberal” leaders I helped vote out that started my path towards seeing things for what they are as opposed to what I had been duped into thinking they were. You make some valid points but you destroy all of them when you make the conclusion that our answer is more government control. They created the chaos and they are using the chaos to justify total control over every person. They don’t love you, man!

Lawrence

Audit the FED! Close the FED! Have the State stand alone without the FED! Issue their own currency. The FED & the Government is the problem. Name ONE thing the US Government has done RIGHT since 1920? Everything they have done has FAILED! Just look around its only going to get much worse. Have any of the Banks been held accountable? Has anyone besides Madoff gone to JAIL?

Hit the Reset button!

kevin

@Benjamin

US Constitution, Article I, section 10, clause 1
No state shall…coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts.

There is a very very very good reason for this being the way it is. States and nations will print money to pay their debts, destroying the currency.

John Acord

I’m a fourth generation Californian and I sincerely feel your pain. I left the Peoples Republic of Santa Monica for Texas 15 years ago and never looked back. My family and business have prospered. No state income tax, lower sales taxes, less regulation, greater prosperity, less crime, clean air, less highway congestion. It appears that nearly all of my entrepreneurial friends have also left and I constantly meet former Californians who left for the identical reasons I did. In the USA we can vote with our feet and the feet have spoken. My suggestion to all, I’d look for opportunities in Texas and start packing your bags. California is finished. Certainly by 2012 a federal receiver will be running the place and he’ll be raising your taxes and confiscating your property to pay state debts and payroll. Some federal judge will set aside Prop 13 and impose huge taxes on your property. They have abandoned the productive, they will not abandon the welfare state because in their Bolshevik minds the “needy” are entitled to whatever wealth you have left. By the way, BHO and his horde of Bolsheviks will have a hard time confiscating Texas property. In Texas we have plenty of guns and are prepared to use them. We will defend our property and ourselves. I am sure no one in California can make a similar claim, at least realistically. You’re all invited to join us.

Greg, you wrote,
“So true Benjamin. However, this crisis is not supposed to be solved, just like we can’t figure out how to keep those bad ol’ messicans from sneaking across our border, or how to stop the thousands of tons of drugs from coming in to our nation, or how to make people work in order to eat, or how to stop illegal invaders from getting government (taxpayer) benefits…. America is very intentionally being brought to such a point-of-no-return crisis that the sheeple will bleat out longingly for our wolf-leaders to rescue us with a new currency and a new nation that is combined with Mexico and Canada.”

That’s the best synopsis I’ve seen or heard. Bravo!

http://paydayloans-compared.com/ pjw

Nobody’s gonna let California collapse. That would result in the whole of the US credit rating being downgraded worldwide as lenders fear other states following suite and America becoming a basket case by default. No one’s going to allow that. Tough times ahead sure, but the sun will shine again on the west coast you can be sure.

Ron

As a nation we are only as strong as our weakeast link, if it breaks we all fall.

cw

Study what we do in Sweden.We have the best economy in the world now (and we have a right wing government not socialist :O) )

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fred

capitalism is great aint it.quit propping up a dead system. live on what you earn not what you can borrow